Honda Does Better At Corporate Governance

Honda Motor Co., Ltd. (NYSE:HMC) just expanded its earlier recall of Acura TL cars that have potential power steering problems to include Accords. This development is the latest example of how the Tokyo car maker has been openly and honestly improving its corporate governance, ranging from revamping its supervision of senior management to disclosing information to global investors.

While having to recall a product can be an indication of quality concerns, Honda seems to be taking responsibility and acting proactively to address its problems. In earlier years it had recalled Acura TLs, warning that if the power steering hoses in the cars were exposed to prolonged high temperatures they could crack and leak, potentially causing a fire, according to a filing with the U.S. National Highway Traffic Safety Administration. In September this year, Honda informed the agency that it was including an additional 573,147 vehicles including certain model year 2003 through 2007 Accord V6 vehicles, bringing the total number of recalls to 625,762. Honda said no crashes or injuries have been reported related to the issue, but one engine fire has, Reuters said on October 1. The company will notify owners and dealers that it will install new heat resistant power steering hoses free of charge.

This isn't the only example of Honda recently taking responsibility for its past mistakes and fixing them. The company openly acknowledged in a press release in February 2011 that it wanted to "speed-up and streamline decision making by the Board of Directors, further strengthen its monitoring and supervisory functions, and respond to the requests of shareholders and investors." To address the problem, Honda downsized its board to 12 directors as of late June 2011 from twenty. Its policies provided for a board of not more than 15 directors as of June 2011, down from 30 the previous year.

While the smaller board of directors is a positive step, Honda continues to have the right to elect a separate board of corporate auditors of not more than seven, and it currently has enlisted five people including Masaya Yamashita and Hideki Okada, who are not independent as they both work for Honda. Typically, the boards of directors at global public companies include audit committees consisting of three or more members, one of whom is clearly delineated as the chair, which are responsible for the oversight of audit issues and the outside auditor. To Honda's credit, the company discloses this deficiency of its board clearly on its website, also noting that it stems in part from differences between Japanese and U.S. law.

Honda also submits annual 20-F filings to the Securities and Exchange Commission that detail not only the names and biographies of its board of directors, but also that no family relationship exists between any director or executive officer and any other director or executive officer. The scandal-torn Japanese equipment maker Olympus Corp., in contrast, publishes an English language results notice for its April shareholder meeting that runs only four pages long and merely lists the names of directors.

That's not the only indication that Honda provides more information to international investors than some of its local peers. Analysis of Honda's financial statements resulted in an Accounting and Governance Risk (AGR ®) score of 76, indicating higher accounting and governance risk than only 24% of comparable companies. Honda's AGR has reflected average risk in every quarter but one during the past three years.

There are other positive signs. The non-profit The Carbon Disclosure Project analyzed disclosures from 396 of the largest companies by market capitalization included in the FTSE Global Equity Index Series -- and gave Honda the highest score among all Japanese companies included in its Carbon Disclosure Leadership Index, which measures how much information companies provide about their climate change policies.

When Honda reported this August on its corporate social responsibility between April 1, 2011 to March 31, 2012, the car maker made no pretense at perfection. "Going forward, Honda will continue to raise the level of transparency in its operations," Honda said.

Perhaps the most telling sign of sincerity is the willingness to acknowledge that more work on improving corporate governance remains ahead. At the very least, now we know that Honda has managed to recall several hundred thousand power steering hoses before they blew up in people's faces.

Region: North America

Country: Japan

Sector: Cyclical Consumer Goods / Services

Industry: Auto / Truck Manufacturers

Market Cap: $ 60,088.7 mm (Large Cap)

AGR Rating: Average (76)

ESG Rating: C

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a financial reporter at GMI. The reporter has no business relationship with any company whose stock is mentioned in this article. Nobody paid GMI to write this article on his or her behalf.